France Needs $43 Billion to Meet Debt Targets — but Rejects Austérité

French auditors reveal a $43 billion funding shortfall for 2012 and '13, forcing Socialist President François Hollande to shift his focus from progrowth efforts to measures that look a lot like austerity he criticized elsewhere

Less than a week after he delivered on promises to push through stimulus programs for the debt-mired economies of France and the European Union, French President François Hollande began focusing his efforts — and public attention — on what’s sure to be seriously painful domestic belt-tightening. On Monday, France’s independent Court of Accounts delivered a Hollande-commissioned audit of state finances, revealing that his Socialist government will need to fill a funding gap of around $43 billion over the next two years in order to meet its E.U.-mandated deficit-reduction targets. No one had any illusions about what that means. Still, there was a refusal to use that painful word. “There’ll be tax increases, there’ll be spending cuts, but I reject any talk of austerity,” Finance Minister Pierre Moscovici told news station i-Télé on June 25. “We must avoid a budget policy that hurts economic activity.”

Indeed, according to Didier Migaud, the Socialist president of the Court of Accounts, the audit makes it evident that everyone in France must painfully pay up to fill the massive shortfall in funding his audit has uncovered. “It will require an unprecedented brake on spending, and higher taxes,” Migaud says, warning that any attempt to forestall the looming crunch will imperil France’s “economy and public finances, and [could open] the possibility of debt spiral.”

About the only upside in that announcement for Hollande and fellow Socialist Prime Minister Jean-Marc Ayrault is that both men knew the bad news was on the way. One of Hollande’s first moves was to order the audit of state accounts to examine what he suspected had been excessive, unfunded pre-election spending by his conservative predecessor, Nicolas Sarkozy. But while that gave Socialists a culprit to point at, Monday’s findings made it clear the real problem in France’s financial mess is falling state revenues amid stymied economic activity. And since that’s not likely to improve soon, it makes slashing outlays an obvious and urgent move.

The study said French leaders must find between $7.6 billion and $12.5 billion in new income or savings to reduce France’s 2011 budget deficit representing 5.2% of GDP to the promised 4.5% this year. More formidable still, auditors predicted a $41.6 billion shortfall in Hollande’s plans to slash the 2013 budget deficit to 3%. That effort will become tougher still if growth forecasts are further revised downward from their current 0.4% for 2012, and 1% in 2013. As it stands, France’s current debt level — representing 89.3% of GDP — is set to surpass 90% by year’s end, possibly bringing Paris under the same kind of lending pressure from bond markets that have pushed Italy and Spain’s financial situation to the breaking point.

Fortunately, Hollande never hid the fact that austerity was inevitable in facing the crisis — even if he and his Cabinet now refuse to use the A word to describe looming cuts. As he told TIME in a campaign interview, Hollande has called raising taxes and cutting spending unavoidable in addressing the debt problem. His caveats, however, are that belt-tightening must also be accompanied by efforts to nurture revenue-generating growth — and that the pain of sanitizing public finances be shouldered by France’s wealthiest in a way he says it was not under conservative rule. “People must see that while the collective effort may be long and difficult, it’s going to be fair — and involve everyone,” Hollande told TIME. “People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole — but on the condition that money is being spent effectively and that everyone is paying their part.”

Many French political analysts believe Hollande and his government will emphasize increasing taxes on the affluent and companies within broader efforts to lift income and cut spending across all sections of society. Perhaps as a precursor of that strategy, Hollande has ordered an overall freeze on state spending this year and deep cuts in some ministries, even as he confirmed promises to create 100,000 new jobs in areas like police forces, social services and education. By giving to targeted areas with one hand and taking away even more generally with the other — and demonstratively pinching the rich all the while — Hollande’s government is looking to reap the curative benefits of austerity without admitting to having embraced it.

The attentiveness to public purchasing power — and Hollande’s pledge to distribute the tax agony fairly — is why his government is thus far refusing the audit’s urging to nudge France’s value-added tax rate up from its current 19.6%. The same thinking is behind its rejection of increasing a payroll tax used to finance the state health care system’s deficit — an item past French governments repeatedly boosted in times of need. And little wonder why: the audit predicts that a 1% rise in that specific payroll duty would generate $14.6 billion in new revenues alone.

But for now, Hollande and his government are sticking to their progressive guns — though that determination will likely be tested soon. Migaud says enduring restoration of French financial health can only result from longer-term state-spending reductions. A main priority in that, the audit says, will be cutting the number of employees in France’s public sector, which currently produces one of every five jobs. Hollande has already planned a moderate thinning of those ranks, though those measures — already criticized by unions — will doubtless need to be expanded as the debt crisis rages. If so, Hollande may eventually be forced to sing a full-throated ode to austerity, unless his European efforts to stimulate economic growth prove more productive than most observers are betting on.